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TETRIS
Work Package 6 Quantitative Analysisof
International Emissions Trading
Christoph Böhringer, Ulf Moslener, and Niels
Anger
TETRIS Final Conference, Brussels, November 30,
2006
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Objectives

• Develop macroeconomic model (computable general
  equilibrium CGE) of international trade and
  energy use featuring the EU ETS in 2010
• Integrate project-based JI and CDM within
  top-down CGE framework accounting for
• Transaction costs
• CDM-specific investment risks
• Technology transfer
• Quantitative assessment of economic and emission
  impacts triggered by climate policies

Workpackage leader

• ZEW

• Ecoplan
• CCAP
• ECN
• NTE

Workpackage participants
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Model inputs

• GTAP 6 database, EU and DOE energy projections to
  2010
• EU-27 allowance allocation NAP II
• Project-based CDM cost and potential (work
  package 2 and 3)
• Project-based transaction costs (work package 3)
• Premium on CER price
• Upward shift of CDM supply curve
• Composite investment risk indicator (work package
  1)
• Risk premium on CER price
• Upward shift of CDM supply curve risk lowers
  expected return of CDM projects

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Implementation of bottom-up CDM supply function
(including transaction costs and risk)
Key MAC marginal abatement cost, TC
transaction costs, R investment risk
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General Equilibrium Model PACE
PACE (Policy Assessment based on Computable
Equilibrium)

• Multi-sector, multi-region model of the global
  economy
• Incorporation of market interactions and income
  closures
• Calibration of technologies and preferences based
  on empirical data

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Model regions
EU-27 Member States
Rest of ratifying Annex B parties Russian Federation Rest of Former Soviet Union Japan Canada
CDM host countries China incl. Hong Kong India Rest of East South Asia Brazil Central South America South Africa
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Climate policy scenarios
Central scenario dimensions
Scenario Regulatory scheme CDM access Transaction costs Investment risk
ET Emissions trading No No No
ET_CDM Emissions trading Yes No No
ET_CDM_TC_R Emissions trading Yes Yes Yes
Key ET emissions trading, TC transaction
costs, R investment risk
Additional scenario dimensions

• No Hot Air (No Hot Air supply from FSU)
• Additionality (Restricted CDM projects)
• Supplementarity (Limit on CER imports)

Permit supply and demand restrictions
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International CO2 permit price (US/t CO2)
Key HA hot air, Add additionality
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Sensitivity analysis for CO2 permit price
Illustration Scenario ET_CDM_TC_R withouthot
air ? CO2 price 0.98 US/tCO2)
max1.44
90 quantile 1.32 US/tCO2
Technique Monte-Carlo simulations on
key elasticities
Mean 1.054
Median 0.98
10 quantile 0.89 US/tCO2
min0.83
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Emission reduction of EU-27 ( vs. BAU)
Key HA hot air, Add additionality, Supp
supplementarity
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Welfare loss for EU-27 ( change in equivalent
variation)
Key HA hot air, Add additionality, Supp
supplementarity
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Implementation of projects

• Implementation of CDM projects based on numerical
  simulation results
• Procedure (linkage of model and CDM database)
• Simulation of CO2 permit prices for alternative
  policy scenarios
• Derivation of marginal abatement cost levels on
  the project-based CDM supply curves (CDM
  database)
• Identification of implemented projects (number /
  volume) within the CDM database

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Implemented CDM projects (volume share by region)
No CDM restriction
Additionality
CDM Potential
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Conclusions (1)

• Low permit price and small macroeconomic impacts
  due to large
• potentials of cheap CDM permit supply
• Given prices for CER futures Hidden costs of
  CDM investments?
• Transaction costs and investment risk increase
  permit price, but
• limited impact on the macroeconomy based on
  underlying CDM data
• Large impact of Additionality criterion,
  Supplementarity rule
• and restriction of Hot-Air on permit price
  and adjustment costs

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Conclusions (2)

• China, CentralSouth America and Rest of East
  South Asia
• as dominant CDM host regions. Sectoral
  distribution dominated
• by Electricity, Agricultural Products and
  Public Sector
• Additionality criterion decreases number volume
  and distribution
• of CDM projects significantly ? exclusion of
  No-Regret options
• Transaction costs and investment risk deter
  implementing CDM projects,
• and change project portfolio in favor of
  large-scale options

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TETRIS
Work package 6 Quantitative Analysisof
International Emissions Trading
Christoph Böhringer, Ulf Moslener and Niels Anger
TETRIS Final Conference, Brussels, November 30,
2006